Behind Tom Wolf's business success, a more complicated picture

Tom Wolf, the front-runner among Democrats hoping to challenge Gov. Corbett, has built his campaign on a simple and compelling business success story, which he posted on the "About Tom" tab at the front of his website, and reinforced in his speeches and ads ever since he announced his campaign to supporters last year:

He is a successful businessman, rich enough to put at least $10 million of his own money into his campaign - even after saving his company from bankruptcy by giving it "every penny I had."

Wolf's message is getting through: Voters queried by Franklin and Marshall College in a March poll released Thursday showed that Wolf enjoyed a "sizable lead" over Rob McCord, Allyson Schwartz, and Katie McGinty among likely Democratic voters. Democrats whose view of Wolf is "favorable" outnumbered those whose views were "unfavorable" by a ratio of 15-1.

Investment and loan documents reviewed by The Inquirer indicate that Wolf's business and financial story is more complicated than a 30-second political ad might permit.

Wolf's family business - the Wolf Organization, a kitchen-cabinet design and distribution firm - has lost nearly half its value since the recession and the debt it took on in a leveraged buyout designed to pay a total of $60 million to Wolf and two of his cousins.

In reports to investors, the buyout fund that financed that deal, Boston-based Weston Presidio Fund V, says its investment in the Wolf Organization is worth just $22 million - a big drop from the $41 million Weston has invested in the company since 2006.

Reached at his Boston office, Weston Presidio cofounder and partner Michael F. Cronin, who sits on the Wolf Organization's board, declined to comment on Wolf and referred any questions to Weston Presidio chief operating officer Therese Mrozek, in Weston Presidio's San Francisco office. Efforts to reach Mrozek were unsuccessful.

The fund's partial buyout of Wolf's firm benefited him and his two cousins, but it has been a loss so far for the fund's investors, the largest of which is Pennsylvania's underfunded State Employees Retirement System (SERS). SERS voted in December 2004 to invest $50 million in the fund, said SERS spokeswoman Pamela Hile. SERS had invested in previous Weston Presidio funds since 1998.

Wolf led a financial rescue to stabilize the company - "I went back into the burning building," as he puts it - but the company is not yet back to its former value and has not begun to repay him and other investors, he acknowledges.

That hasn't necessarily affected Wolf's business reputation.

"His policies aside, I think he's viewed as a very solid guy, a well-respected guy who has been successful in building his business," said Kenneth Graham, senior managing principal at Inverness Graham, a Newtown Square firm that invests in private companies, and a member of a family that, like the Wolfs, are longtime York County business owners.

The transactions raise an obvious question for Wolf's campaign: If Wolf really committed all his money to saving the family business, and if that business remains depressed, where did he get $10 million to run for governor?

In an hour-long interview with Inquirer reporters and editors, Wolf told more of the story than he tells in his campaign materials and speeches.

In 2006, Wolf, 65, said, he and two cousins who co-owned the company were ready to retire. Though five generations of Wolf family members have been in business in Mount Wolf, the York County town named for an ancestor, and also the Wolf Organization's base, none of the three cousins had children interested in succeeding them.

So, Wolf said, he and his cousins decided to "take some cash out of the business," through what bankers call a leveraged buyout - a common transaction for private-company owners.

They prepared to hand over day-to-day operations to a team of professional managers, who they hoped would keep the company going for employees and customers.

And they began planning to sell a two-thirds stake in the company, for $60 million (about $20 million each for the three cousins).

Even after the deal, the cousins would still own the remaining one-third of the Wolf Organization, with each owning 11 percent.

The cousins wanted the managers to buy in. But they knew that group wouldn't be able to raise the whole $60 million. So they hired an investment banking firm - Boenning & Scattergood, of West Conshohocken - to interview buyout funds, which invest in private companies in hopes of selling later at a profit.

Boenning interviewed dozens of funds and recommended Boston-based Weston Presidio, whose other investments include Jimmy John's, the fast-food chain, and Re/Max, the real estate sales company.

Weston Presidio Fund V, formed the previous year, agreed to buy a 47 percent stake in the Wolf Organization, for $32 million.

Wolf Organization managers committed an additional $5 million, and got 20 percent in stock, including options.

That didn't make $60 million, the cousins' sale price. So the company borrowed the remaining $23 million from M&T Bank. Indeed, state records show M&T Bank lent $50 million to pay the cousins and other creditors, and agreed to lend more if needed.

Wolf says he didn't know the state pension system was the largest investor in Weston Presidio Fund V - until his spokesman passed along a question from The Inquirer.

The deal was done, and Wolf moved on, giving up day-to-day management. He joined the administration of Gov. Ed Rendell as secretary of revenue in early 2007. Wolf stepped down in late 2008 in hopes of planning his own run for governor.

But in January 2009, amid the national recession, Wolf Organization managers told Wolf they had been unable to keep current on their M&T loans, which by now totaled $64 million. Even after shutting down the lumberyards that accounted for a majority of the company's former workforce, they warned Wolf that the bank was going to foreclose, forcing the shutdown of Wolf's distribution business.

Wolf looked over the books. He found "too much debt, and not enough sales," he said.

Even though a chunk of that debt had ended up in Wolf's pocket, he had no legal obligation to pay it back, he said. But he felt responsible to his workers, family, customers, and the town.

Wolf said he met with M&T and agreed to raise money to pay down the debt, surprising bankers who had been ready to take over the company's assets.

He sold his securities investments and collected $11 million - all his assets except a much smaller amount of "illiquid" investments he couldn't readily turn into cash.

The two cousins each kicked in $3 million to $4 million, Wolf says. Weston Presidio agreed to put up several million more, though noting in reports to investors that the Wolf Organization, at that moment, had zero resale value.

The millions enabled the Wolf Organization to pay down its bank debt so it could at least break even. Also, Tom Wolf stepped back in as chief executive. Wolf said he refocused its business on designing and sourcing cabinets, not just distributing them.

The result: As of Dec. 31, 2013, Weston Presidio - in reports to clients - values its total $41 million investment in the Wolf Organization at $22 million. That's up from zero, Wolf notes, though it's still a lot less than the fund paid.

With the company's value still depressed, Wolf acknowledges that though the business is now modestly profitable, he has been in no position to take money out of the company.

So where did Wolf get the $10 million of his own money that he has said will finance his campaign?

Some of it - less than half, he says - wasn't his own money, but a loan from M&T that he will have to repay.

A smaller amount - but "more than $1 million" - came from the sale of part of his stake in Irex Specialty Contracting, of Lancaster, one of his investments that were "illiquid" in 2009.

The rest, Wolf said, includes gains squeezed from the recovering stock market: "I really cobbled together everything I had."

Will Weston Presidio and SERS ever get their money back? Will Wolf?

He says he hopes so. And he promises the outside investors will get paid before he does.

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